The U.S. Federal Trade Commission ("FTC") and Department of Justice ("DOJ") announced Tuesday a Notice of Proposed Rulemaking ("NPRM") that, if implemented, would dramatically increase the burden on parties required to submit pre-merger notification filings under the Hart-Scott-Rodino Act (the "HSR Act"). Such filings are required for merger and acquisition transactions valued above $111.4 million.
Some aspects of the proposed rule implement provisions of the Merger Filing Fee Modernization Act, which Congress passed at the end of 2022, pursuant to which filing fees for large transactions increased nearly ten-fold, from $280 thousand to $2.25 million. But the majority of the FTC and DOJ's proposed changes to the HSR Act requirements are discretionary initiatives that will radically transform the process-and cost-of M&A.
The likely effects of the proposed rule are two-fold: (1) the initial regulatory burden of doing deals would be much higher, regardless of the anticompetitive risk from the transaction, and (2) the new information in the filing would allow the FTC and DOJ to screen mergers for a wider variety of potential theories of harm, including to pursue theories where there is no clear guidance from courts on the criteria for blocking a transaction.
According to the FTC's own estimate, the proposed amendments would increase the reporting burden on filing parties in excess of 100 hours, on average, and in excess of 200 hours for nearly half of all notified transactions. In practice, the proposed amendments will drastically increase the time required to prepare pre-merger notifications in the United States, in many cases by months. And, unlike in foreign jurisdictions that have simplified filing obligations for transactions that clearly do not raise competitive concerns (often called a "short form"), most of the additional information called for by the proposed amendments will be required for all HSR reportable transactions, regardless of the potential for anticompetitive harm.
Today, the FTC and DOJ gather much of the same information required by the proposed amendments using "voluntary access letters," which they issue to parties only after they initially screen a merger and decide to open a preliminary investigation. The agencies' model access letters, which are generally tailored to specific transactions, request parties to voluntarily provide information such as: organization charts; strategic and marketing plans; descriptions of products and services including products in development; customer and competitor lists with contact information; and market share information.
Unlike agency access letters, however, the information required by the proposed amendments is not voluntary or tailored to the specific transaction. Rather, the proposed amendments would increase the burden associated with all HSR notifications well beyond that typically required when responding to agency access letters. The agencies would use the new information to review the merger for the statutorily mandated 30-day waiting period, at which time they can pause the transaction further by issuing a request for additional information (a "second request"). Many of the requirements in the proposed rule used to be reserved only for the relatively small number of transactions that warranted second requests each year. In 2021, for instance, parties submitted HSR filings for 3,520 transactions, and only 1.9% of the transactions (65 in total) resulted in the agencies issuing second requests.
As for some specifics of the proposed rule: if implemented, it would require filing parties to-
- Provide explanations of the strategic rationale for transactions and an overview of potential competitive overlaps such as horizontal and vertical relationships between the parties and their customers;
- Produce significantly more competition-related documents, including so-called item 4(c) and 4(d) documents prepared by or for "supervisory deal team leads" in addition to officers and directors, as well as drafts of such documents and strategic business documents not created in contemplation of the transaction;
- Provide transaction- and business-related documents, such as diagrams, timelines, descriptions of licensing, non-compete, or non-solicitation agreements, agreements between the parties that are not related to the transaction, and for deals filed prior to execution of a definitive agreement, the draft agreements or more detailed term sheets;
- Provide significantly more information regarding the parties to the transaction, including descriptions of all business operations, additional information regarding corporate structure and ownership stakes (including special disclosures targeted at private equity firms), and a list of all officers, directors, and board observers and the other entities for which they currently serve or have served during the past two years;
- Provide significantly more information about the prior acquisitions of both parties to the transaction, including by expanding the time period for disclosure from five to ten years, and eliminating the disclosure threshold (currently, reporting is required only for entities with $10 million in sales/assets in year prior to the acquisition);
- Provide information intended to assist the FTC and DOJ in assessing whether the transaction may impact labor markets (standard occupational classifications, geographic data, workplace safety);
- Make disclosures regarding subsidies received from foreign governments or agencies, as well as existing or pending defense or intelligence procurement contracts; and
- Identify other jurisdictions that may be conducting a competition review of the transaction.
Many of these substantive additions will give the agencies a trove of new information to screen mergers for more speculative theories of harm (or potentially launch entirely new investigations, concerning issues like employee non-compete agreements or interlocking directorates). While the current HSR filing requirements are optimized to identify transactions that might pose a threat of horizontal concentration when the parties serve overlapping customers, the new requirements show that the agencies will take an in-depth look at all filings to screen for theories of harm such as:
- The buyer cutting off competitors' access to sources of inputs;
- The combination might result in concentration that would weaken demand for upstream inputs such as labor; and
- The transaction is part of a series of small acquisitions in a "roll-up" strategy that gradually concentrates the market or a "killer acquisition" strategy designed to nip competition in the bud.
Questions remain as to the need for such additional information in all HSR filings, given the relatively few cases the government has successfully brought pursuing these theories. With one notable exception - the Penguin Random House/Simon & Schuster case involving concentration among buyers of author manuscripts - the Biden Administration has yet to win any merger cases in court that would affirm the evidentiary criteria that should be used to identify problematic mergers under these theories. Indeed, prior Administrations considered and rejected the need to make major additions to the information and documents collected during the pre-merger notification process. And some of the additions in the proposed rule may actually be at odds with the "Recommended Practices for Merger Notification and Review" that the FTC and DOJ published as part of the International Competition Network in order to harmonize approaches across jurisdictions.
The NPRM announcement is the latest move by the FTC and DOJ to reform the merger review process and the antitrust enforcement approach to mergers generally. The FTC and DOJ previously announced their intent to overhaul the substantive standards for merger review. Following a request in early 2022 for public comments, the FTC and DOJ are likely to produce new merger review guidelines ("Guidelines") later this year.
Although most antitrust practitioners were expecting the Biden Administration's reform efforts to come in the form of the new merger Guidelines, the proposed amendments to the premerger filing process could be even more consequential. Only a tiny fraction of merger filings are scrutinized at the level of detail outlined in the Guidelines, and an even smaller number are actually challenged under those standards. That means the vast majority of companies undertaking transactions are not likely to directly feel the effects of revised merger Guidelines. The burden of complying with the HSR rules, by contrast, affects every company engaging in a transaction above a certain size, regardless of its potential for anticompetitive harm.
The FTC indicated it will publish the proposed rule in the Federal Register by the end of the week, and stakeholders will then have sixty days to submit comments. This is likely to be the only chance for interested parties to comment on the proposed rule and build a record of its anticipated effects. After considering the comments, the agencies can at any time promulgate the final version of the rule. That final rule must address substantial issues raised in the comments. When the FTC first promulgated rules for the HSR Act, the public comment was "extensive," which resulted in meaningful changes to the proposed rules.1
Footnote
1. Premerger Notification, 43 Fed. Reg. 33450, 33452 (July 31, 1978) ("Because of the extensiveness of public comment, it became clear to the Commission that some substantial revisions would have to be made in the original rules.").
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